Ethanol: at the cliff's edge?

Whatever you think of ethanol, it could well be the most emotional fuel on the planet. Midwestern farmers have invested in ethanol plants and see it as energy that's green and homegrown. Environmentalists who dislike corn despise ethanol even more, blaming it for soil erosion and deforestation. And critics in Congress who view the industry as coddled have finally succeeded in ending its 45¢-a-gallon volumetric ethanol excise tax credit (VEETC). It expires on December 31.

But visit the farms of Jeff Taylor in Gilbert, Iowa, or Paul Kenney of Amhearst, Nebraska, and you'll find a surprisingly upbeat view of the industry's prospects.

In recent years, KAAPA Ethanol has decided to invest as partial owners in two other ethanol plants, a 54-million-gallon plant in Lima, Ohio, and a 110-million-gallon plant in Janesville, Minnesota, originally built by the bankrupt VeraSun Energy.

And although livestock producer groups are trying to weaken the federal mandate to use ethanol, the renewable fuel standard, Kenney isn't among the cattle producers behind that effort. He feeds distillers' grains to the calves from his 400-cow herd. “I hate it when one area of agriculture is pitted against another,” he says. “What's big oil doing to us?”

Taylor's yield monitor was showing better than 50-bushel beans as his combine wrapped up a field near his Iowa farm. He, too, was optimistic about Lincolnway Energy's prospects. After high corn prices squeezed margins into negative territory in the third quarter, profits returned. “I think we will have finished positive for the whole year,” he says.

The Nevada, Iowa, plant has other sources of revenue. It sells carbon dioxide to a local meat processor that uses it to freeze its products. It extracts corn oil that is sold to biodiesel plants. It's looking at using a boiler that burns coal to burn waste from a cellulosic ethanol plant planned nearby, if such green sources of energy are also profitable.

Nor is Taylor too worried about the end of VEETC.

“I think we have felt that if we lose VEETC, there would be a short period of time when the margins would be tight, and then we would be OK,” Taylor says.

Market aided by exports

Experts on the industry seem to agree, for several reasons. Futures prices of gasoline and ethanol suggest that ethanol will remain cheaper than gas even without VEETC. (See chart on next page.) Operating margins should remain in the black for a few months, at least. And the U.S. has become the Saudi Arabia of ethanol, exporting to Canada, Europe, Brazil, and even the Middle East.

“That's what's supporting the price of ethanol. We're on track to export a billion gallons this year,” says Wally Tyner, a Purdue University economist who is a national authority on biofuels.